USD/CAD advanced for a second consecutive day on Wednesday, extending its rebound from the 1.3970 to 1.3965 zone, the lowest level since September 16.
The pair pushed further above 1.4060 during the Asian session, touching a fresh one-week high as traders now turn their attention to key central bank events.
The Bank of Canada is widely expected to raise rates by 25 basis points, though the real market focus is not entirely on Ottawa's decision.
Attention has shifted instead to the outcome of the two-day Federal Open Market Committee meeting and any subsequent policy remarks from Federal Reserve Chair Kevin Warsh.
Investors are closely watching whether the Fed will signal further tightening or offer clearer guidance on its future path.
In addition, Thursday's key US macro releases, including the preliminary third-quarter GDP reading and the Personal Consumption Expenditures price index, will serve as a crucial window for the market to seek more clues on the Fed's policy trajectory.
The combined impact of these data points and Fed commentary will directly determine the near-term strength of the US dollar, providing fresh trading momentum for USD/CAD and potentially shifting the Canadian dollar's performance against other currencies.
Fed Rate Pricing: December Hike Odds Above 80%, Energy Inflation Concerns Support the Dollar
Meanwhile, according to the CME Group's FedWatch tool, traders have priced in a probability of more than 80% that the US central bank will hike rates again in December.
This high probability stems mainly from inflation concerns triggered by elevated energy prices, with the market worried that rising energy costs could push overall price levels higher again through both direct and indirect channels, forcing the Fed to maintain or even intensify its hawkish stance.
Moreover, stalled US-Iran negotiations and a fresh round of attacks on Saudi Arabia have kept geopolitical risk premiums firmly in place.
Safe-haven sentiment has consequently intensified, helping the US dollar attract buyers for a fourth straight session as the market's preferred refuge amid uncertainty.
The combination of energy-driven inflation and geopolitical risks has not only underpinned the dollar's short-term strength but also reinforced expectations that the Fed may take more hawkish action, keeping the greenback at a relative advantage across major currency pairs.
Oil Prices and Geopolitics: Houthis Claim Strike on Saudi Defense Ministry, Rising Crude May Cap Further Gains
However, rising oil prices could lend support to the commodity-linked Canadian dollar, creating an upside headwind for USD/CAD and warranting caution among bulls chasing higher levels.
According to media reports on Tuesday, the United States has told several Gulf Arab states to prepare for a possible short, high-intensity military operation against Iran after the November 3 midterm elections.
At the same time, Yemen's Iran-backed Houthi forces claimed to have struck the Defense Ministry in Riyadh, Saudi Arabia's capital, with a ballistic missile, asserting a direct hit.
The continued stagnation of US-Iran talks has further heightened concerns that tensions in the Middle East could escalate.
These developments combined to push oil prices, which had pulled back for two days after hitting multi-month highs last Friday, back into favor with buyers.
The rebound in crude not only enhances the Canadian dollar's commodity-currency appeal but may also indirectly influence Fed policy pricing by raising global inflation expectations, thereby placing some constraint on USD/CAD's upside potential.
Summary
USD/CAD looks set to rise for a second consecutive day on Wednesday, breaking above 1.4060 during Asian trading to touch a one-week high and extending its rebound from the lowest level since September 16.
The Bank of Canada is expected to hike rates by 25 basis points, but the focus lies on the Fed's decision and Warsh's remarks, as well as Thursday's US third-quarter GDP and PCE data.
CME FedWatch shows December hike odds above 80%, while inflation concerns driven by high energy prices, stalled US-Iran talks and attacks on Saudi Arabia have drawn safe-haven dollar buyers for a fourth straight day.
The US has told Gulf allies to prepare for military action against Iran after the midterm elections, and the Houthis claim to have hit Saudi Arabia's Defense Ministry with a ballistic missile, keeping geopolitical risk premiums firm.
Rising oil prices could benefit the Canadian dollar and act as a headwind for USD/CAD, requiring bulls to remain cautious.
Near-term direction for the pair depends on the relative signals from the Bank of Canada and Federal Reserve decisions.
As of 13:58 Beijing time, USD/CAD was trading at 1.4065/66.
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